5 Facets of Performance Management for the Future

5 Facets of Performance Management for the Future

The business value of traditional performance management models is collapsing. Instead of clarifying expectations and building morale, legacy annual appraisal models of performance management can alienate talented and typical employees alike. While personal and enterprise tools and technologies for performance enhancement have radically improved; performance management systems have not.

Recognizing these realities, growing numbers of companies are tying performance management more closely to operational success and less closely to their operations’ calendar. This shift—toward making performance management more business-value relevant—is having a dramatic effect on how human capital is managed in the enterprise. Findings from the 2019 Performance Management Global Executive Study and Research Project, sponsored by McKinsey & Company, identifies five key facets of smart investment in performance assessment, accountability, and capability:

1. On-Demand FeedbackFormal feedback processes have typically been periodic, perfunctory, and problematic. Continuousness is now becoming king. Just as people rely on Google Maps or Waze to manage real-time expectations around travel, employees need to be able to manage real-time expectations around work.

Performance management tools and platforms should facilitate ongoing feedback on individuals’ progress, growth, and development opportunities. Feedback will increasingly be automated, customized, visualized, and communicated in different ways. Executives must determine how best to define the feedback experience for their workforce. Culture will matter more. Senior management must develop shared perspectives on performance management’s purpose in their organization.

2. Going Beyond Today’s Performance Criteria Performance management now means cultivating new capabilities (such as skills and innovation), not just improving existing efficiencies. This distinction cannot be minimized or overstated. Some organizations measure employees on skills development; some measure managers on whether they are exemplifying company values; and some measure executives on their progress with digital transformation.

Prioritizing and facilitating interaction around these different factors forces top managers to revisit their leadership styles and substance. At Ceridian, for example, “We’ve given people the ability to take risks and not be penalized for taking risks,” says Lisa Sterling, executive vice president and chief people and culture officer. She describes how the company’s CEO, David Ossip, supports a top-down change in company culture. “I often tell people, ‘I’d rather you make a decision that is aggressive and innovative and forward-thinking and fall flat on your face than do something that makes you feel comfortable.’ When your CEO supports that kind of bold experimentation, people’s decision-making changes.”

3. Team Assessment Matters More Value-added processes and deliverables—particularly ones touching customers and clients—increasingly depend on cross-functional teams. Given mixes of full-time employees, part-time staff, gig workers, and geographically dispersed contributors, performance management must still be assessed in the context of team-based outcomes. Credibly measuring team performance matters as much as measuring individual contribution. This remains elusive for many organizations.

“The big challenge for a lot of companies and for HR as a function is how we transition from a philosophy and a whole infrastructure we built around individuals to an environment where it’s about teams and collaboration,” Anna Tavis, clinical associate professor of human capital management at New York University, observes, “We haven’t figured out how to measure and how to value collaboration.”

4. Democratizing Performance Enhancement Legacy performance management approaches have typically taken a three-pronged approach: Identify high performers to promote and develop them; identify the low performers so they may be culled. While hardly afterthoughts, the solid but statistically “average” performers were neither focus nor beneficiary of performance management systems design.

A new structural and cultural emphasis on talent, technology, and human capital development by market leaders disrupts that. Talent assessment and evaluation remain central but, increasingly, organizations embrace digital media and platforms to cultivate new competences and capabilities in the broader workforce. Boosting the “mean” and the “median” is becoming an enterprise priority.

Coaching—not just rating, ranking, and review—is becoming part of the new performance management dynamic. Digital economics makes this option simpler, cheaper, and more scalable. Just as important, the business impact and influence of these human capital investments can be quickly measured and assessed.

5. People AnalyticsPeople analytics is becoming a dominant source of insight into what performance means in an organization. Ben Waber, CEO of people analytics software provider Humanyze, describes a Fortune 500 client considering a move that would consolidate 800 senior managers, scattered among dozens of countries, in Singapore. Looking at traditional metrics like moving costs, rent, salaries, and benefits, the company concluded that the move would result in an annual savings of $6 million. Most bottom-line-oriented companies, Waber asserts, would have embraced those savings and “stopped there. You would have said, ‘We are saving money, so we are going to do that.’”

However, this organization recognized top-line and organizational risks as well. They decided to seriously analyze “how is this going to change not individual performance, but the performance of this entire division,” Waber recalls. Using people analytics, the company concluded increased cohesion among senior leadership would come at the cost of dramatically decreasing cohesion within working teams. Modeling adverse team impacts, the company concluded the move would more likely result in an $11 million annual loss. The proposed consolidation would break valuable formal and informal networks.

Digitally detailing how individuals work and communicate with each other means people analytics can identify new sources of value creation.

Rethinking performance management demands senior leadership reconsider how best to invest in and derive greater value from their people. This implies a willingness to accept that the performance management future will powerfully influence the future of enterprise culture. They must understand what they want from “performance” not just this year but in the strategic future. Is their organization ready to disrupt itself to assure that talented and typical alike can become their best selves? A commitment to high performance now requires commitment to high performance management systems.

The Authors:

Michael Schrage is a research fellow at the MIT Sloan School of Management’s Initiative on the Digital Economy.

Bryan Hancock is a partner and a leader in the Organization practice at McKinsey & Company.